VW aims to increase profitability after emissions scandal

Volkswagen’s chief executive has revealed a strategy aimed at increasing the carmaker’s profitability and innovation, and moving the troubled German carmaker on from its diesel emissions scandal.

Matthias Müller, who in April said there would be “no sacred cows” spared in an ambitious turnround strategy for VW, on Thursday called his vision the “biggest change process in the company’s history”.

The group is aiming to raise its operating margin before exceptional items from the 6 per cent achieved last year to 7-8 per cent by 2025, with much focus on improving the underperforming VW passenger car brand.

The 12-brand group is also preparing a bigger push into electric and self-driving cars.

Mr Müller pledged that VW’s ballooning costs would be brought under control, by setting limits on capital spending and research and development expenses.

"To coin a phrase, the next few years will see us working off the fat to build muscle," he said, speaking at VW's headquarters in Wolfsburg. "And it will be a full-body workout, taking in all business units and all brands."

In 2010, capital spending and research and development costs represented 5 and 5.5 per cent respectively of automobile sales, but rose to 6.9 and 7.4 per cent last year. Mr Müller said both would be capped at 6 per cent by 2025.

Arndt Ellinghorst, analyst at Evercore ISI, said VW group could save more than €10bn a year if it attained these targets.

“This, in our view, can only be achieved through delivering significant efficiency gains in its underlying business,” he added.

VW is under increased pressure to cut costs following the emissions scandal.

US regulators revealed last September that VW had installed software in its diesel cars that served to understate emissions of harmful nitrogen oxides. VW subsequently disclosed that up to 11m vehicles worldwide had been fitted with the technology.

Mr Müller said VW group would introduce more than 30 electric vehicles by 2025, with an annual sales target of 2-3m units.

He added battery technology must become a core competency at the group.

“To accelerate innovation, we will be specifically harnessing outside impetus; for example, by relying to a greater extent on acquisitions and venture capital investments,” said Mr Müller.

In further cost-cutting measures, he said VW’s modular architecture for vehicles would be reduced from 12 to four.

He also signalled a shake-up of VW’s components business. A person familiar with the plan said the idea was to make VW’s sprawling components operations more competitive with suppliers, relying on more out of house production when it made sense.

“We have rid ourselves of the illusion that we can do everything better or develop everything ourselves,” said Mr Müller.

VW group is targeting a return on capital for its automobile activities of more than 15 per cent by 2025. The dividend payout has been set at about 30 per cent of net profit.

Hans Dieter Pötsch, VW chairman, lent his support to the strategy, saying: “It’s about a new vision for Volkswagen, but also about clear objectives.”

- (Copyright The Financial Times Limited 2016)